What can we learn from overseas buyers?

Overseas businesses and investors have long found Britain to be a welcoming and beneficial platform for mergers and acquisitions. But the relationship is far from one way and the UK has a lot to thank foreign buyers for, including the recent rally within the post-recessionary M&A market. But are British buyers letting their foreign counterparts take over and missing out on the chance to learn from foreign companies' approach to buying distressed businesses and their assets? We've taken a closer look at recent trends to ascertain where who is making a killing in the M&A market and where domestic investors are missing out.

The heavy presence of overseas companies in the UK has long been a point of contention. While other G7 countries have kept a close reign on what foreign investors could buy and control, Britain has swung the other way and gradually removed many of the restrictions on overseas investment.

It is generally thought that this process of deregulation was kicked off in the late seventies by the then Tory Chancellor Geoffrey Howe. Years of further policies designed to stimulate business culminated in the open-door immigration policies of Tony Blair's New Labour government and foreign investors flocked to buy up British companies in order to take advantage of the UK's burgeoning economy, strong skills base and valuable research and development assets.

But much of this foreign investment took place during the boom years of the late nineties and the early 2000s when the presence of global investment banks in London's financial districts, decades of liberal takeover rules and, crucially, easy access to cheap borrowing made Britain one of the top destinations for international acquisitors. However, by the end of the decade things looked very different indeed and the bleak post-recessionary landscape left things eerily quiet on the M&A front.

As well as their bank accounts – both personal and corporate – investors’ confidence also took a bashing and it has taken time for this to be rebuilt. Now, nearly five years after the crash, pockets of the global economy are finally showing signs of a return, if not to actual growth then at least to a belief in the possibility of expansion. Business buyers in these areas are searching for safe but profitable places to put their money and the UK M&A market has once again caught their attention, just like it did in the nineties.

On top of improvements in local M&A market conditions, the weak value of the pound has provided additional encouragement to overseas investors. Sterling has been rocked in recent years due to political uncertainty with the Coalition Government and a lack of strong economic growth in GDP figures. Moody's downgrading of the UK's AAA credit rating for the first time since the 1970s proved a further hit, and the pound hit a two-and-a-half-year low against the US dollar in February. While this is problematic for Brits looking to spend or invest abroad, overseas investors are finding bargains in the UK where their money is going a lot further.

A number of deals involving overseas buyers and British companies have hit the headlines recently. The trend is evident at all levels of business but most noticeably at the higher end of the market, where businesses like Invensys, Weetabix, Northumbria Water, Autonomy and Cadbury's have sold off all or parts of their companies to foreign investors. The Kraft purchase of Cadbury's hit the headlines for all the wrong reasons when the US company reneged on its promise to keep factories and jobs in the UK when it bought the iconic confectionary group in 2012. But Invensys – a multimillion pound turnover British engineering company – oversaw a successful sale of its hi-tech rail signalling division last year to German company Siemens for £1.7 billion; while back in 2011, Cambridge-based software group Autonomy was sold to US computing giant Hewlett-Packard for £6.6 billion.

Over the past few years much of the M&A activity in the UK has been at the higher end of the market. Now, opportunities too good to ignore in the midcap and SME markets are being exploited by foreign investors. Cue the recent acquisition of the iconic 240-year-old menswear brand Gieves & Hawkes, snapped up by the Hong Kong-based Li & Fung.

Eastern businesses have often been drawn to British firms and its clear that many of these companies know how to make the most of a distressed business. Back in 2005, China's Shanghai Automotive Corporation (SAIC) was quick to move in on troubled Rover to snap up its assets. The firm made a joint approach for the British carmaker's assets after the group declared bankruptcy. SAIC was initially in the running to enter into a joint venture agreement with Rover, but when this fell through and the British firm was forced to cease operations, the eastern company took on the role of vulture and picked through Rover's cut-price assets through the administrators.

Although currency fluctuations are currently swaying things in the favour of overseas buyers, there is no reason why flourishing domestic companies can't follow a similar M&A strategy by targeting distressed UK companies. Businesses in the science, technology and engineering sectors are finding this approach particularly effective as it offers a shortcut to expensive and time-consuming research and development (R&D) investment.

David Willetts, Science Minister, commented on the trend when revealing how he will allocate science funding: “I sometimes think companies overseas have a better understanding of the value of the research that goes on in Britain than we do here in the UK. They are often very interested in some of our technologies and will buy them up if they can.”

A perfect example is the October 2012 purchase by Australian company Calix Ltd of innovative technology to produce building products resulting in a carbon negative footprint. The technology was spun out of Imperial College research to Novacem, a UK company that pumped £4-5 million into the project, but then ran out of development cash. The disappointed founder of Novacem predicted that the technology would make its new Australian owner billions within a decade. Calix bought the technology from the insolvency practitioners for a few hundred thousand pounds.

But R&D opportunities aren't the only thing bringing overseas buyers to the UK - interest in other areas has also shot up in the past couple of years. The food and beverage sector, for example, has seen the percentage of acquisitions made by overseas buyers double from just 7 per cent in 2011 to 14 per cent in 2012, according to figures from accountancy firm Grant Thornton.

Trefor Griffith, head of food and beverages with Grant Thornton, suggested the sector is likely to see even more interest from overseas buyers in the coming months.

“Iconic British brands such as Weetabix and KP Snacks are now foreign-owned and we expect the BRIC countries in particular to increase their acquisition of some of the top British and Irish food and beverage businesses,” he said. “However, the picture for availability of capital has been improving in recent months and the potential for developing overseas markets should also give further reason for optimism for UK F&B businesses looking for growth.”

Things are also busy in financial services, where 46 per cent of companies in Britain worth more than £100 million are overseas-owned. The figure, which comes from a study conducted by independent M&A adviser IMAS and UK Trade & Investment, is predicted to rise to 50 per cent within three years and is largely made up of US investors. While, in media, the recent $23 billion buyout of Virgin Media by US cable giant Liberty highlights the attractiveness of low cost debt that many UK companies have been able to secure.

On the one hand, overseas buyers are causing some problems for British business buyers: Currency exchange rates and market differences are allowing some foreign buyers to step in and usurp local buyers. But if we take a longer-term view on the matter, it becomes clear that overseas buyers are breathing life into the UK's M&A market, as new injections of finance start to filter down to UK-based SMEs and open up new routes of expansion on both a national and global scale. This growth could well be even faster if British buyers step up and learn from the examples of their overseas counterparts by recognising global potential and profiting from a distressed business opportunity.

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